Audit of SECs Employee Recognition Program and Recruitment, Relocation and Retention Incentives

8/6/2019 Audit of SECs Employee Recognition Program and Recruitment, Relocation and Retention Incentives

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Appendix III

SEC Employee Recognition Program and 3R Incentives August 2, 2011Report No. 492

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Audit of SECs EmployeeRecognition Program andRecruitment, Relocation, and

Retention Incentives

August 2, 2011Report No. 492


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Employee Recognition Program and 3R Incentives August 2, 2011Report No. 492

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Should you have any questions regarding this report, please do not hesitate tocontact me. We appreciate the courtesy and cooperation that you and your staffextended to our auditors during this audit.

Attachment

cc: James R. Burns, Deputy Chief of Staff, Office of the ChairmanLuis A. Aguilar, CommissionerTroy A. Paredes, CommissionerElisse B. Walter, CommissionerKathleen L. Casey, CommissionerJeff Heslop, Chief Operating Officer, Office of Chief of OperationsDiana Davis, Business Manager, OHRRebecca Pikofsky, Assistant Director, Employee and Labor

Relations, OHR


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Audit of SECs Employee RecognitionProgram and Recruitment, Relocation, andRetention Incentives

Executive Summary

Background. The Securities and Exchange Commissions (SEC orCommission) Employee Recognition Program (ERP) is designed to motivateemployees and recognize contributions above and beyond normal jobrequirements with monetary and nonmonetary awards and to improve theefficiency of operations through an employee suggestion program. Awards maybe granted for contributions either within or outside an employees jobresponsibilities.

The Office of Human Resources (OHR) has authority for managing theCommissions awards budget and granting final approval of awards. OHR is alsoresponsible for training supervisors to use the ERP effectively to achieveorganizational goals and objectives, providing guidelines for initiatingappropriately selected performance-related awards, encouraging employees tosubmit suggestions to the suggestion program, and evaluating and processingawards and suggestions. Further, OHR is responsible for monitoring andevaluating the adequacy of documentation for award recommendations and theuse of approval authority that is delegated to divisions and offices.

During the period covered by this Office of Inspector General (OIG) audit, fiscalyears 2008 through 2010, the Commission permitted monetary recognitionin theform of special act or service awards, suggestion awards, time-off awards,1

andon-the-spot awards. The Commission also utilized recruitment, relocation, andretention incentives. Recruitment, relocation, and retention (3R) incentives areamong the human capital flexibilities intended to help federal agencies addresshuman capital challenges and to build and maintain a high-performing workforcewith essential skills and competencies.

Objectives. The overall objective of this audit was to assess whether monetaryawards under the SECs ERP and 3R incentives were awarded consistent withapplicable governing policies and procedures. We also examined whetherawards and incentives were linked to the Commissions human capital plan, asapplicable.

Results. In this audit, the OIG found thatOHR has not fully implementedrecommendations made as a result of a 2007 Office of Personnel Management

1Time-off awards are considered monetary awards because they have monetary value in terms

of lost production time to the Commission.


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(OPM) human resources operations audit pertaining to the SECs awardactivities. As a result, we found that similar deficiencies continue to exist. Forexample, we found that there were insufficient resources dedicated to developingand overseeing the ERP and there was a lack of documentary support forsampled awards. We also identified significant time lags between special act

dates and award dates due to award budget allocations being made late in thefiscal year.

The audit also found that OHR does not have updated comprehensive policiesand procedures available to its supervisors and employees regarding SECawards and 3R incentives. Additionally, OHR has not provided supervisors andemployees with formal training in this area. As a result, the Commissions use ofawards and incentives is not as effective as it could be in achieving intendedgoals.

Further, we found that the SECs budgeting processes for awards and incentives

for SK

2

employees are flawed and ineffective. The SECs overall award budgetfor SK staff and average award per person are nominal. Additionally, SECoffices and divisions often are not notified of their award budgets until late in thefiscal year, which has resulted in awards being made significantly after therewarded action occurred. Further, during the period covered by our audit,supervisors were able to use their award budgets only for special act awards,virtually eliminating their ability to reward employees for outstanding performancein the course of their normal job duties and contrary to one of the primarypurposes of the ERP. We also found inconsistencies among offices anddivisions with respect to their adherence to the terms of the budget allocationmemoranda issued to divisions and offices, including instances in which officesexceeded their award budgets or provided awards in advance of receiving theiraward budgets. We determined that payment of awards at the end of the fiscalyear presents various accounting issues, including payroll errors. Lastly, wefound that although Office Heads and Division Directors are ultimately notified oftheir awards budget, they are not notified of funds available for 3R incentives.

Furthermore, we found that OHRs supporting documentation for a large numberof the monetary awards and incentives reviewed for this audit were incomplete.We found that documentation was insufficient to show the basis for the awardsand incentives and that required approvals were properly obtained. We alsofound that an SEC employee was given an award for work that was the subject ofan OIG investigative report. Although the SEC postponed giving the awardpending a determination of whether disciplinary action was warranted against theemployee, the award was eventually granted after an outside consultantdetermined that the employees actions did not warrant formal disciplinary action,even though the outside consultant did not dispute the serious performanceissues pertaining to the employee raised in the OIG report.

2SK is a staff level pay scale used by the SEC in lieu of the GS pay scale.


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Additionally, we found that the SEC made a cash award to an SEC Schedule Cemployee in fiscal year 2010 in violation of OPM guidance restricting awards,bonuses, and similar payments for political appointees.

The audit also found that although OHR had an Employee Suggestion Programin place from 2008 to 2011 that included a monetary incentive component, OHRdid not make any cash awards under the program. Additionally, the program wasgiven little priority and was not effectively managed.

Lastly, we found that the SEC does not currently have in place a human capitalplan. Accordingly, activities associated with the ERP and 3R incentives are notbeing assessed to determine whether they effectively align with the SECs overallhuman capital goals and objectives.

Summary of Recommendations: Specifically, the OIG recommends that the

Office of Human Resources:

(1) Implement an internal review process to review a select number orpercentage of awards annually to ensure that appropriate documentationexists for the awards and needed information is readily available to supportthe awards.

(2) Annually provide information to SEC supervisors on relevant parts of theSEC award program, including (1) types of awards available and proceduresfor nominating employees for awards, (2) appropriate types of division-andoffice-level awards for peer recognition, and (3) successful award practices.

(3) Dedicate specific resources to develop and oversee the EmployeeRecognition Program.

(4) Finalize its policies and procedures for the Employee Recognition Programwithin three months and publish them on the SECs Insider. The policiesand procedures should include information on current practices fordetermining bonuses for Senior Officers (SO), policies for determiningperformance-based awards for SK employees, and acceptable methods ofproviding informal nonmonetary awards in addition to traditionalnonmonetary awards.

(5) Review and update its existing policies and procedures on recruitment,relocation, and retention incentives. The update should ensure that the newpolicies and procedures reflect appropriate references to SK and SOemployees and include expanded authority for retention bonuses.


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(6) Provide formal training on its revised policies and procedures and issueinformation notices to supervisors and employees as needed to reflectchanges in practices and policies.

(7) In conjunction with the Office of Financial Management (OFM), take the

following actions:

7a. Develop alternatives for reviewing the SEC awardbudget so that it is competitive with other federalagencies award budgets.

7b. Develop and implement a mechanism to rewardemployees for superior or meritorious performance withintheir job responsibilities through lump-sum performanceawards.

7c. Determine ways to reduce the time required forformulation of budget allocations, including, for example,moving responsibility for formulating award budgetallocations to OFM and having the Office of InformationTechnology walk-in development center develop anelectronic program to pull payroll data directly from theDepartment of the Interior to facilitate more timelycompletion of budget allocations.

7d. Implement a process to make initial award allocations inthe first quarter of each fiscal year, thereby giving officesthe ability to make awards throughout the year. Baseinitial allocations on historical data and then refine theallocations, as needed, when the SECs annual budgethas been approved.

7e. Allocate award funds directly to SEC divisions andoffices instead of placing the initial award funds in OHRsbudget, and hold office and division heads responsiblefor monitoring use of the funds.

7f. Re-examine budgeted amounts for recruitment, relocation, andretention incentives to ensure that sufficient funds are available, andmake supervisors aware of available funding so that they caneffectively use incentives to recruit and retain needed talent

(8) Develop and train human resources specialists on a centralized filing system(manual, electronic, or both) for all awards that contains appropriatedocumentation to support the awards, including SF 50 and SEC Form 48with narrative justification and appropriate approvals.


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(9) Implement management controls to ensure that employees who are subjectto disciplinary action are restricted from receiving awards related to theperformance that resulted in the disciplinary action.

(10) Review the August 12, 2010, cash award to a Schedule C employee to

determine whether it was in violation of the OPM guidance and, if so, seekrecovery of the improper award.

(11) Consider ways that, as part of the ERP, it may be able to provide awards toemployees for adopted suggestions submitted to the OIGs suggestionprogram.

(12) Revise the service agreement format in SEC Form 2299, Securities andExchange Commission Recruitment Bonus Service Agreement, toincorporate specific reasons that the SEC may and must terminateservice agreements for recruitment and relocation bonuses.

(13) Develop and train applicable human resources specialists on the use of acentralized filing system for all relocation, recruitment, and retentionincentives. The centralized filing system should contain all appropriatedocumentation to support the incentives, including the SF 50 and theapplicable SEC form with the narrative justification for the bonus and theappropriate approvals.

(14) Identify resources and establish a timeline to complete the required humancapital plan. Ensure that ERP activities are evaluated at least annually toensure that they align with human capital plan objectives and strategies.


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TABLE OF CONTENTS

Executive Summary ..................................................................................................... iv

Table of Contents ........................................................................................................ ix

Background and Objectives .................................................................................. 1Background ....................................................................................................... 1Objectives .......................................................................................................... 3

Findings and Recommendations ......................................................................... 4Finding 1: OHR Did Not Fully Address OPM RecommendationsPertaining to SEC Award Practices ....................................................................4

Recommendation 1 ....................................................................... 7Recommendation 2 ....................................................................... 7Recommendation 3 ....................................................................... 8

Finding 2: OHRs Policy for Its Award Program Is Outdated and NotReadily Accessible ............................................................................................8

Recommendation 4 ..................................................................... 11Recommendation 5 ..................................................................... 11Recommendation 6 ..................................................................... 11

Finding 3: OHRs Budgeting Processes for Awards and Incentives AreIneffective ......................................................................................................... 12

Recommendation 7 ..................................................................... 16

Finding 4: OHR Did Not Maintain Adequate Documentation to Support SKAwards Made During Fiscal Years 2008 Through 2010 ................................... 17

Recommendation 8 ..................................................................... 22Recommendation 9 ..................................................................... 22

Finding 5: A Cash Award Was Inappropriately Made to a Schedule CPolitical Appointee ............................................................................................ 22

Recommendation 10 ................................................................... 23

Finding 6: OHRs Employee Suggestion Program Did Not Provide CashAwards During Fiscal Years 2008 Through 2010 and Was Not Effectively

Managed .......................................................................................................... 23Recommendation 11 ................................................................... 26


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Finding 7: OHR Does Not Maintain Adequate Documentation for 3RIncentive Awards, and Related Service Agreements Do Not Meet OPMRequirements ................................................................................................... 26

Recommendation 12 ................................................................... 31Recommendation 13 ................................................................... 31

Finding 8: The SECs ERP and 3R Incentives Are Not Linked to an SECHuman Capital Plan ....................................................................... 32

Recommendation 14 ................................................................... 33

AppendicesAppendix I: Abbreviations/Acronyms. .............................................................. 34Appendix II: Scope and Methodology ............................................................... 35Appendix III: Criteria ......................................................................................... 37Appendix IV: List of Recommendations ........................................................... 38Appendix V: Managements Comments ........................................................... 42

Appendix VI: OIG Response to Managements Comments.............................. 46


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Background and Objectives

Background

Employee Recognition Program. The Securities and Exchange Commissions(SEC or Commission) Employee Recognition Program (ERP) is designed tomotivate employees and recognize contributions above and beyond normal jobrequirements with monetary and nonmonetary awards and to improve theefficiency of operations through an employee suggestion program. Awards maybe granted for contributions either within or outside an employees jobresponsibilities. The Commission determines how much of its budget will beallocated to the ERP and how the budgeted amounts will be allocated among thevarious divisions and offices.

The Office of Human Resources (OHR) has authority for managing the SECs

awards budget and granting final approval of awards. OHR is also responsiblefor training supervisors to use the ERP effectively to achieve organizational goalsand objectives, providing guidelines for initiating appropriately selectedperformance-related awards, encouraging employees to submit suggestions to asuggestion program, and evaluating and processing awards and suggestions.Further, OHR is responsible for monitoring and evaluating the adequacy ofdocumentation for award recommendations and the use of approval authoritythat is delegated to divisions and offices.

During the period covered by this Office of Inspector General (OIG) audit, fiscalyears 2008 through 2010, the Commission permitted monetary recognitionin the

form of special act or service awards, suggestion awards, time-off awards,

3

andon-the-spot awards. A special act or service award is a lump sum cash award inrecognition of an employees special act or service, such as exemplary orcourageous handling of an emergency situation in connection with or related toofficial employment. A time-off award is an excused absence granted to anemployee without charge to leave or loss of pay, in recognition of the employeescontribution to the quality, efficiency, or economy of government operations. Anon-the-spot award is a small lump sum cash award similar to a special act orservice award that is used to quickly recognize one-time and short-term tasks orassignments or other job responsibilities performed by an employee in anexemplary manner. A suggestion award is a lump sum cash award given to an

employee in recognition of the adoption of a suggestion designed to accomplisha job better, faster, or more economically and that results in tangible or intangiblebenefits to the government. The suggestion may save material or property,promote health, increase safety, or improve morale.

3Time-off awards are considered monetary awards because they have monetary value in terms

of lost production time to the Commission.


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For the fiscal year 2008 and 2009 performance periods, all SK employees whoreceived an acceptable performance rating received an equivalent merit increase(i.e., the same percentage adjustment to salary), in accordance with anagreement between the Commission and the National Treasury EmployeesUnion (Union). If the merit increase would have caused an employees pay to

exceed the employees salary grade maximum, the employee would receive theexcess amount as a lump sum payment. Outside of the across-the-board meritincreases, one-time awards linked to an individuals performance rating(performance awards) were not permitted. Therefore, the primary mechanismsto distinguish performance and reward SK employees during the period coveredby our audit were special act or service, time-off, and on-the-spot awards. TheCommission expects to provide SK employees a merit increase of approximately2 percent for fiscal year 2010. Once the details have been worked out, the raiseswill be distributed retroactive to January 2, 2011. SEC Senior Officers (SO) werenot subject to the Commissions agreement with the Union and were eligible toreceive both merit increases and bonuses based on performance during fiscal

years 2008 and 2009. SOs were not eligible for merit increases or bonuses forfiscal year 2010 due to restrictions on bonuses for senior executives.

In fiscal years 2008, 2009, and 2010, the SEC made 3,427, 3,102, and 2,524cash awards, respectively, totaling approximately $4 to $5 million for each of thethree years. Both SK and SO employees received these awards and someemployees received multiple awards. In many cases, groups of employeesreceived awards.

Recruitment, Relocation, and Retention Incentives. Recruitment, relocation,and retention (3R) incentives are among the human capital flexibilities intendedto help federal agencies address human capital challenges and to build andmaintain a high-performing workforce with essential skills and competencies.According to the Office of Personnel Management (OPM), the intent of 3Rincentives is to provide agencies with discretionary authority to use nonbasecompensation to help recruit, relocate, and retain employees in difficult staffingsituations.4

A relocation incentive may only be paid to a current federal employee appointedwithout a break in service who must relocate from one agency to another, or fromone part of an agency to another, in a different commuting area. A recruitmentincentive can be given to an employee new to the federal government. In eithercase, it must be determined that the agency would likely encounter difficulty infilling the position in the absence of such an incentive. A retention incentive canbe paid to a current employee if the unusually high or unique qualifications of theemployee or the special needs of the agency make retaining that employeeessential and it is determined that the employee would likely leave federalservice without the incentive. In November 2007, OPM issued final regulations

4GAO-10-226, Continued Improvements Exist for FDA and OPM to Improve Oversight of Recruitment,

Relocation, and Retention Incentives, January 2010.


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that also give agencies authority to pay retention incentives to employees whowould likely leave for a different federal position before the closure or relocationof the employees office, activity, or organization in the absence of a retentionincentive.5

During fiscal years 2008 through 2010, the SEC paid three employees relocationbonuses totaling approximately $70,000, paid 41 new employees a total ofapproximately $659,000 in recruitment bonuses, and approved 31 retentionbonuses that ranged from approximately 2 to 24 percent of the employees basicpay.

Objectives

The overall objective of this audit was to assess whether monetary awardsawarded under the SECs ERP and 3R incentives were consistent withapplicable governing policies and procedures. We also examined whether

awards and incentives were linked to the Commissions human capital plan, asapplicable.

55 CFR 575.315.


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Findings and Recommendations

Finding 1: OHR Did Not Fully Address OPM

Recommendations Pertaining to SEC AwardPractices

OHR did not fully address recommendations that OPM madein its 2007 review of OHRs human resources operationspertaining to SEC award activities. As a result, we foundthat issues similar to those found by OPM continue to exist.

In November 2007, OPM conducted a human resources audit of OHRsoperations.6

OPM examined the Commissions award activities as part of itsassessment to determine whether the SEC met OPMs results-oriented

performance standard (i.e., the SEC has a diverse, results-oriented, high-performing workforce and a performance management system that differentiatesbetween high and low levels of performance and links individual/team/unitperformance to organizational goals and desired results effectively).

Based on the human resources audit, OPM made a number ofrecommendations7

to OHR in a March 2008 report. During our audit, we foundthat OHR had addressed OPMs recommendations concerning awards and theperformance management system, by electing to separate pay from performanceuntil a new performance management system could effectively make distinctionsin performance. We also found, however, that the SEC had not fully addressed

other OPM recommendations pertaining to award activities.

OPM found that the SEC had only partially achieved the outcome of creating areward environment that is beyond compensation and benefits which contributesto attracting, retaining, and motivating employees. In its comments, OPM statedthat the SEC did have formal policy on the use of on-the-spot and special-act orservice awards. OPM also noted that some SEC divisions or offices useddivision- or office-level awards for peer recognition and that some employeeswere recognized for performance through less formal means, such asopportunities to work on special projects or better assignments. However, OPMfound that the use of such rewards and recognition practices was not consistent

across SEC divisions and offices. OPM also noted that managers said monetary

6OPM conducts independent evaluations of agencies HR programs to ensure they support the mission and

meet merit system principles and related civil service laws. OPM evaluates the effectiveness of agenciesresults oriented performance culture, leadership and knowledge management, and talent management,including delegated competitive examining and excepted service hiring, Source: http://www.opm.gov/Open/About OPM.aspx.7

OPMs review resulted in both required and recommended actions on the part of the SEC which arereferred to generally as recommendations for purposes of this report.


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recognition available for employees in professional positions fell significantlyshort of bonuses employees would be eligible to receive in the private sector.Additionally, OPM stated that employees, supervisors, and managers believedmoney, better work assignments, and peer recognition were the most motivatingrewards.

With respect to use of office-level awards, we found in a preliminary inquirycompleted in March 2010 that a former SEC regional office director used fundsfrom the offices supply budget to purchase nonmonetary honorary and informalrecognition awards in the form of inscribed glass blocks for staff. These informalawards were not issued pursuant to a Commission-sponsored awards program,and we found that the SECs internal regulation, Personnel Operating Policiesand Procedures (POPPS), Employee Recognition Program, dated September 9,1991,did not give SEC division or office directors or the SECs ExecutiveDirector authority to approve awards outside Commission-sponsored awardsprogram. In addition, we determined that the absence of clear criteria for making

such awards could lead to the appearance of impropriety on the part of themanager making the award and a perception of unfairness or favoritism on thepart of staff not receiving an award.8

During its November 2007 review, OPM also found that employees wereconfused about the availability and eligibility of special act and service awards.OPM stated that some SEC divisions or offices made extensive use of all typesof awards but that other units did not. We identified similar trends during thisaudit. For example, we found that some SEC divisions or offices made frequenttime-off awards, while others did not. During fiscal years 2008 through 2010, forexample, the Office of Information Technology made a total of 131 time-offawards, while the Office of Financial Management (OFM) made only 13.9

As a result of its review, OPM directed10

8

SEC Office of Inspector Investigative Memorandum entitled Employee Recognition Program and Grants ofEmployee Awards, PI 09-07 (Mar. 10, 2010).

OHR to educate the SEC workforceabout relevant parts of the award program and recommended that OHR shareinformation about successful awards practices across the Commission. Inresponse, OHR stated that it would send out information about a new employeesuggestion program with instructions by June 1, 2008; post the information aboutthe employee suggestion program on the SECsintranet, theInsider; and sendan e-mail to SEC employees by August 1, 2008, to encourage them to readabout the awards program on the Insider. OHR also stated that betweenNovember 2007 and the end of fiscal year 2008 it would collect and analyzeinformation on awards practices at the SEC and, as appropriate, shareinformation on best practices across the Commission.

9While there is a disparity between the offices in size, this size difference does not solely account for the

difference in numbers of time-off awards.10

This was referred to by OPM as a required action.


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The SEC issued a formal policy for its employee suggestion program in March2008, but OHR was unable to provide us with any documentation to show that ithad sent an e-mail to SEC employees by August 1, 2008, to encourage them toread about the awards program on the Insider. Additionally, OHR was unable toprovide us with documentation to show that it collected and analyzed information

on award practices or shared information on best practices throughout the SEC.

OPM also examined whether awards and recognition were processed accordingto law and OPM and agency regulations and procedures. OPM found that OHRonly partially met this standard. OPM found that the SEC had not evaluated itsawards program to determine compliance with OPM and agency regulations andpolicies. In addition, OPM noted that it identified documentation issues, such asmissing signatures, reviewer titles, and dates, during its review of a sample ofindividual and group special-service or act awards. OPM also found significantlags between the actual dates of special acts or services and the award dates.We found that similar issues persist. As discussed in more detail in Finding 4,

OHR was not able to timely produce documentation to support various awards.We also found significant gaps between special act dates and award dates andthat multiple awards were made to the same individuals at the end of the fiscalyear. We believe that these lags and multiple year-end awards to individualsoccurred in many cases because managers did not receive their awardallocations until late in the fiscal year due in part to continuing resolutions.

As a result of its findings related to OHRs processing of awards, OPM directedOHR to conduct an evaluation of its awards program to determine the programsefficiency, effectiveness, and compliance with merit system principles, and OPMrecommended that OHR streamline the approval process for awards so thatawards could be issued closer to the time of the act or service being rewarded.

OHR stated in its response to OPM that it would evaluate the SEC awardsprogram in accordance with 5 Code of Federal Regulations (CFR) 451.106(d)after the end of each fiscal year.11

OHR also stated that it would seekauthorization to increase the award approval limits for Office Heads and DivisionDirectors from $1,499 to $2,500 to streamline the process for larger awards andthat it would continue to distribute initial award allocations during the first quarterof each fiscal year.

Although we found that OHR had increased award approval limits for OfficeHeads and Division Directors to $2,500, we also found that significant gapsbetween special-act dates and award dates persist because award allocationsare being provided in the third quarter of the fiscal year. Additionally, OHR wasunable to provide documentation to show that annual award reviews were beingconducted to address the documentation issues OPM cited during its review.OHR informed us that it does conduct a review of award data that is submitted to

115 CFR 451.106(d) states the following: Agencies shall evaluate their award program(s).


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the Union at the end of each fiscal year and holds informal discussions amongOHR management to identify trends and potential issues related to the awardsprogram.

OHR provided OPM a response on July 1, 2008, to address the completion of

select recommendations in OPMs March 2008 report, but the completed actionswere not related to the SEC awards program. OHR informed us that turnoverand reassignments of OHR staff had a negative effect on OHRs ability to fullyaddress OPMs recommendations. We believe that the absence of a designatedgroup in OHR with primary responsibility for the ERP has led to OHRs inability tofully achieve the OPM-specified outcome of creating a reward environment at theSEC beyond compensation and benefits that contributes to attracting, retaining,and motivating SEC employees. For example, we found that different groupswithin OHR are responsible for budget formulation and awards processing. Wealso found that responsibility for oversight of the ERP was handled by OHRsEmployee and Labor Relations Branch at one time and was then transferred to

the Center for Talent Management and Employee Programs because of staffretirements and reassignments.

Without an effective internal review process, education of SEC supervisors andmanagers concerning the ERP, and adequate staff resources dedicated todeveloping and overseeing the ERP, the issues found by OPM and our audit maypersist, weakening the effectiveness of the ERP and its ability to achieveintended outcomes.

Recommendation 1:

The Office of Human Resources should implement an internal reviewprocess to review a select number or percentage of awards annually toensure that appropriate documentation exists for the awards and neededinformation is readily available to support the awards.

Management Comments. OHR concurred with this recommendation.See Appendix V for managements full comments.

OIG Analysis. We are pleased that OHR concurred with thisrecommendation.

Recommendation 2:

The Office of Human Resources should at least annually provideinformation to SEC supervisors on relevant parts of the SEC awardprogram, including (1) types of awards available and procedures fornominating employees for awards, (2) appropriate types of division- andoffice-level awards for peer recognition, and (3) successful awardpractices.


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Recommendation 3:

The Office of Human Resources should dedicate specific resources todevelop and oversee the Employee Recognition Program.



Finding 2: OHRs Policy for Its Award Program IsOutdated and Not Readily Accessible

OHR does not have updated comprehensive policies andprocedures available to its supervisors and employeesregarding SEC awards and recruitment, relocation, andretention incentives. Additionally, OHR has not providedsupervisors and employees with formal training in this area.

ERP

OHRs policies and procedures for its awards program are located in the POPPSManual, chapter 451.A, Employee Recognition Program, but much of thisguidance is outdated and not available electronically on the SEC intranet. Thischapter was last updated in February 1993 and contains information that is nolonger relevant. For example, it refers to guidance applicable to GeneralSchedule and Senior Executive Service employees rather than to SK and SOemployees. The guidance also contains information on quality step increasesand suggestions awards, which are no longer available award options. Further,

the guidance does not reflect the SECs current practices for determiningbonuses for SOs.

In connection with the preliminary inquiry noted earlier, we recommended thatthe SEC develop more detailed guidance for nonmonetary awards.12

12

SEC Office of Inspector General Investigative Memorandum entitled Employee Recognition Program andGrants of Employee Awards, PI 09-07 (Mar. 10, 2010).

Thepreliminary inquiry found that the POPPS Manual did not specifically address


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whether informal nonmonetary awards in addition to traditional ERPnonmonetary awards were authorized and did not address what criteria,standards, and approvals were pertinent to such awards. The POPPS Manualalso did not make clear that appropriated funds could not be used to pay foremployee parking as an award.

Further, with OHRs recent implementation of the new performance-based ratingsystem, we determined that OHR should issue guidance to supervisors onacceptable approaches for calculating performance awards that reflectmeaningful distinctions based on the level of performance to ensure thatemployees with higher ratings of record receive larger cash awards.

OHR has recently dedicated resources, including hiring a contractor, to draft newpolicies and procedures for the SECs ERP. By memorandum dated March 29,2011, the Associate Executive Director of OHR notified the SEC Chairman thatOHR is reviewing the ERP to identify and implement changes that will enable

managers to effectively reward employees in a timely manner and in accordancewith regulation. The Associate Executive Director of OHR further stated that thechanges will be informed by the findings and recommendations of this audit,results from the SECs compensation study being conducted by Towers, Watson,and Co.,13

and collaboration with OFM regarding funding cycles for awards.

OHRs target date for having final policies and procedures in place is before theend of fiscal year 2011. However, we found that in the recent past, OHR has notmet target dates for developing new policies and procedures. For example, wefound that in response to Recommendation No. 1 in our March 2010 investigativememorandum,14

which recommended that OHR revise its internal award policies,including the pertinent sections of the POPPS Manual, OHR stated that it wouldbring the entire policy up to date by September 10, 2010. OHR did not meet thistarget date, however, and the policy has not been completed to date.

We conducted searches of the Insider to identify information availableelectronically to supervisors and employees on the ERP and awards, and wefound that minimal information existed and that the information available wasdifficult to locate. Our review found that the only information available as ofMarch 2011 was a link under OHR Employee Relations to Special Act and Time-Off Awards. The link is to SEC Form 48, Award Recommendation andApproval, which supervisors can use to nominate their employees for special act,suggestion, time-off, or on-the-spot awards. The form also contains anattachment consisting of a table with a brief description of the various types ofawards and refers supervisors to the POPPS Manual for more information.

13The purpose of the study is to assess the Commissions current compensation design. Based on the

study's findings, the SEC will consider recommendations to ensure that the Commissions compensationdesign is fair and transparent and enables the SEC to recruit and retain the staff necessary for the SEC toachieve its mission. Towers Watson was expected to complete its report by the end of June 2011.14

SEC Office of Inspector General Investigative Memorandum entitled Employee Recognition Program andGrants of Employee Awards, PI 09-07 (Mar. 10, 2010).


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However, the POPPS Manual is not available electronically on the Insider. Wealso noted that although SEC Form 48 was last updated in August 2009, it isoutdated because it refers to a suggestion award that is no longer available atthe SEC, as discussed in Finding 6.

3R Incentives

SEC policies and procedures related to 3R incentives are set forth in threePOPPS Manual chapters: 575.A, Recruitment Bonuses, dated July 20, 1993,chapter 575.B, Relocation Bonuses, dated July 20, 1993, and chapter 575.C,Retention Allowances, dated August 27, 1996. These policies and proceduresare outdated, however. For example, the POPPS policies pertaining toincentives make references to GS and SES employees rather than SK and SOemployees. In some areas, the policies do not reflect recent regulatory changesrelated to 3R incentives.15

For example, retention bonuses, as of 2007, may beapproved for employees for whom the SEC has a special need during a period

before the closure or relocation of the employees office, facility, activity, ororganization, if the employee would likely leave the SEC for a different position inthe federal service in the absence of a retention incentive. This authority is inaddition to the authority permitting retention bonuses for employees who arelikely to leave the SEC for a position outside the federal government. However,OHRs current policy does not mention this expanded authority for retentionbonuses and its application within the Commission. During the course of thisaudit, OHR acknowledged the need to revise its policies and procedures andstated that it had begun drafting changes to existing policies.

Formal Training

In addition to reviewing internal policies and procedures, we sought informationfrom OHR pertaining to formal training provided to supervisors and employees onmethods for rewarding employees and the various incentives that are available.OHR said that to the best of its knowledge, there was no specific trainingprovided on awards and incentives during fiscal years 2008 through 2010, butbelieved that these areas were touched on during performance managementtraining.

Unless OHR ensures that its policies and procedures related to awards andincentives are up to date and readily available to all employees, and that

supervisors receive adequate training on those policies and procedures, theCommissions use of awards and incentives is unlikely to be as effective aspossible in achieving the intended goals of its awards and incentives programs.For example, lack of up-to-date information in the POPPS manual might result inmanagers unawareness of their ability to offer retention bonuses to some

15Regulations related to 3R incentives are in CFR Title 5: Administrative Personnel, Part 575

Recruitment, Relocation, and Retention Incentives; Supervisory Differentials; and Extended AssignmentIncentives.


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employees. Additionally, uneven application of policies and procedures that mayoccur because of the lack of up-to-date information could lead to employeeperceptions of unfairness.

Recommendation 4:

The Office of Human Resources should finalize its policies andprocedures for the Employee Recognition Program within three monthsand publish them on the SECs Insider. The policies and proceduresshould include information on current practices for determining bonusesfor Senior Officers, policies for determining performance-based awards forSK employees, and acceptable methods of providing informalnonmonetary awards in addition to traditional nonmonetary awards.



Recommendation 5:

The Office of Human Resources should review and update its existingpolicies and procedures on recruitment, relocation, and retentionincentives. The update should ensure that the new policies andprocedures reflect appropriate references to SK and SO employees andinclude expanded authority for retention bonuses.16



Recommendation 6:

The Office of Human Resources should provide formal training on itsrevised policies and procedures and issue information notices tosupervisors and employees as needed to reflect changes in practices andpolicies.

16We note that in order to implement this recommendation, OHR will need to determine whether updated

policies and procedures will include expanded authority for retention bonuses contained in CFR Title 5:Administrative Personnel, Part 575- Recruitment, Relocation, and Retention Incentives; SupervisoryDifferentials; and Extended Assignment Incentives, in light of its pay setting authority provided for in Pub. L.No. 107-123, Investor and Capital Markets Fee Relief Act, January 16, 2002.


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Finding 3: OHRs Budgeting Processes forAwards and Incentives Are Ineffective

The budgeting processes and procedures that the SECcurrently uses for awards and incentives for SK employeesare flawed and ineffective.

The SECs overall award budget for SK staff and average award per person are

nominal.

17

Additionally, SEC offices and divisions often are not notified of theiraward budgets until late in the fiscal year, which has resulted in awards beingmade significantly after the rewarded action occurred. Further, during the periodcovered by our audit, supervisors were able to use their award budgets only forspecial act awards, virtually eliminating their ability to reward employees foroutstanding performance in the course of their normal job duties and contrary toone of the primary purposes of the ERP. We also found inconsistencies amongoffices and divisions with respect to their adherence to the terms of the budgetallocation memoranda issued to divisions and offices, including instances inwhich offices exceeded their award budgets or provided awards in advance ofreceiving their award budgets. Further, we determined that payment of awardsat the end of the fiscal year presents various accounting issues, including payrollerrors. Lastly, we found that although Office Heads and Division Directors areultimately notified of their awards budget, they are not notified of funds availablefor 3R incentives.

SK Awards

To examine the activities associated with the SECs budget for awards andincentives, we obtained information from OHR and OFM related to budgetformulation, allocations, and expenditures for SK awards for fiscal years 2008through 2010. We also obtained information from the Office of the Executive

Director related to work conducted by the Boston Consulting Group (BCG), whichconducted a study that, among other things, compared the SECs award budgetto the award budgets of other governmental and nongovernmental entities.18

17This does not take into consideration the monetary value associated with time-off awards. During FY08-

FY10, the SEC made 3,601 time-off awards totaling 49,181 hours.18

The Boston Consulting Group, U.S. Securities and Exchange Commission Organizational Study andReform, March 10, 2011.


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The SECs overall award budget for SK staff and average award per person arenominal. Based on data OHR provided, we found that the average award perperson for fiscal years 2008, 2009, and 2010 amounted to $925, $930, and $951,respectively.19 According to BCGs March 10, 2011, report to Congress,because the percentage of compensation the SEC has allocated to the merit pay

pool is just 1.5 percent

20

and merit pay has not been linked to the SECsperformance management system,21 the SEC struggles to differentiate highperformers through merit compensation. BCG also acknowledged that the SECcan reward performance through one-time monetary awards, but remarked thatthe SEC award budget is minimal, representing approximately 0.5 percent of theCommissions overall compensation budget, or about $2 to $3 million. BCGstated that the median government award budget is just over six percent andgoes as high as 12 percent. BCG concluded that the SEC would need to raiseits award budget to at least 3 percent of total compensation, or $15 to $20million, to align the budget with public sector benchmarks.22

We also found that SEC offices and divisions often are not notified of the amountof their award budgets until late in the fiscal year. As noted earlier, this latenotification has resulted in lags between actions rewarded and the awardsthemselves. For fiscal years 2008 through 2010, OHR and the Office of theExecutive Director (OED) determined offices and divisions budget allocations forSK monetary awards. In general, the process consisted of gathering payrollinformation regarding executive staff23

and the SK staff count for each office anddivision and the aggregate basic pay for SK employees at headquarters and theregional offices. This information was then used to derive the aggregate SK payfor each division and office as a percentage of the total SK pay for theCommission. Using this percentage and the total award pool (minus the amountset aside for SK employees who are part of the executive staff), an awardallocation was calculated for each office and division. The OED then sentmemoranda to Office Heads and Division Directors notifying them of their awardallocations and requesting that they nominate employees for awards. For fiscalyears 2008, 2009, and 2010, the allocations totaled approximately $3.3 million,$3.3 million and $3.6 million, respectively.

19For 2008 and 2009, OHR calculated this amount by dividing total SK award expenditures by the

aggregate SK staff count on board during these fiscal years. For 2010, OHR calculated the amount bydividing the total funds allocated for fiscal year 2010 awards by the aggregate SK staff count on boardduring this fiscal year.20

Increase to base pay for all employees rated acceptable.21 The same percentage was provided for all employees rated acceptable with no differentiation based onperformance.22

BCG noted, however, that with regard to funding predictability and funding levels, despite materialincreases in responsibility for the SEC under the Dodd-Frank Wall Street Reform and Consumer ProtectionAct (Dodd-Frank Act), that the SECs resources have not grown in proportion and in contrast, otherregulators have increased resourcing to respond to the crisis or to changing regulatory environments. Forexample, BCG stated that the FDIC doubled its funding to $2.3 billion in 2009. BCG also acknowledged thatother federal regulators are self-funded and have more funding flexibility.23

Includes SK pay level staff in the Office of Executive Staff, direct reports to the Chairman, CommissionersOffices and Office of Legislative and Intergovernmental Affairs.


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The SECs award budget allocation process is not completed until after theCommissions annual appropriation has been approved, which may be severalmonths into the fiscal year.24

Additionally, the calculation of budget allocationsand issuance of related memoranda takes several weeks to complete after theCommissions appropriations are approved. In fiscal years 2009 and 2010, the

OED sent out allocation memoranda to Office Heads and Division Directors onAugust 11, 2009, and July 1, 2010, respectively. In both years, awardnominations had to be made by early to mid-September, with the actual awardsanticipated to be processed by the end of the fiscal year. Because theallocations were not determined until the fourth quarter of the fiscal year, wefound instances where there appeared to be significant time lags between theactions being rewarded and the actual award.

Moreover, we found that during the period covered by our audit, supervisorswere able to utilize their award budgets only for special act awards, virtuallyeliminating their ability to provide monetary awards to employees for superior or

meritorious performance within their job responsibilities. For the fiscal year 2008and fiscal year 2009 performance periods, all SK employees who received aperformance rating of acceptable received the same merit increase (adjustmentto salary), based on an agreement the Commission entered into with the Union.If the merit increase would have caused an employees salary to exceed themaximum for the grade, the employee received the excess amount as a lumpsum payment. One-time awards linked to an individuals performance rating(performance awards) were not permitted. Therefore, the only mechanism todistinguish performance and reward SK employees during the period covered byour audit was through special act or service awards and time-off or on-the-spotawards. Consequently, while one of the purposes of the ERP is to rewardemployees for performance throughout the rating period, the SEC does notcurrently have in place a mechanism to do so.

We also found inconsistencies among offices and divisions adherence to theterms of the award allocation memoranda. Some offices exceeded their totalaward budgets, and others provided awards in advance of receiving their awardbudgets. We found, for example, that by the time OFM received its fiscal year2010 allocation memorandum, which specified an award allocation of $43,500,OFM had already used $28,100, more than half of the allocated amount, forawards. Although OFM sought and received approval from OHR before it madethe awards, other offices and divisions were not informed that seeking andobtaining advance approval was an option available to them. We also found thatthe Office of Administrative Services and the Office of Investor Education andAdvocacy had each made awards totaling approximately $7,000 in fiscal year2010 before they received their allocation memoranda. In addition, according todata that OHR provided, several offices exceeded their total award allocations.For example, based on information provided by OHR, the OED exceeded its

24We acknowledgethat there have been instances where the SEC has not received its appropriation until

several months into the fiscal year as a result of multiple continuing resolutions.


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fiscal year 2008 allocation of $5,014 by $10,986, approximately 319 percent andits fiscal year 2009 allocation of $7,200 by $4,400, or approximately 161 percent,and the Office of Public Affairs exceeded its fiscal year 2008 allocation of $6,959by $10,001, or approximately 244 percent, and its fiscal year 2009 allocation of$6,900 by $18,000, or approximately 361 percent.

Further, we determined that payment of awards at the end of the fiscal yearpresented various accounting issues. Based on our review of informationprovided by OFM, we found that the SECs entire awards budget is initially heldin OHR. For fiscal year 2010, OFM transferred award funds from OHR to thevarious SEC offices and divisions after OED had notified them by memorandumof the amount they had been allocated for awards. OFM made these transfers to(1) allow offices and divisions to see their allocation in their budget reports and(2) prevent payroll errors by having the funding already in offices and divisionsbudgets. During the fiscal year 2010 end-of-year closeout process, however,OFM learned that the majority of awards would not be fully processed before the

end of the fiscal year. As a result, most of the award allocations (less anyawards already paid out) were transferred back to OHR to be obligated under asingle miscellaneous obligating document.25 Because of the payment of awardsat the end of the fiscal year and resulting actions deemed necessary by OFM forthe-end of-year close-out process, we found that payroll errors related to a lackof funding availability in specific budget object codes for some divisions andoffices occurred despite OFMs effort to eliminate such errors by initiallytransferring award funds to offices and divisions. As a result, extra time had tobe spent to resolve the errors and process the awards. A recent OIG report onthe SECs budget execution process found that budgetary controls were changedin the SECs Momentum accounting system to facilitate obligation of payrollcharges (including awards) for fiscal year 2009 that were received in the firstquarter of fiscal year 2010, which could lead to an Anti-Deficiency Act violation.26

3R Incentives

We found that while there is a specific amount set aside for recruitment bonuses,relocation and retention money comes from a different, more general fundingsource within the SEC. For fiscal year 2010, approximately $126,000 wasbudgeted for recruitment bonuses.

We found that unlike awards, office and division heads are not notified of the

amount of funds available for recruitment, relocation, and retention incentives.As a result, managers might not offer retention incentives, for example, becausethey are uncertain about the availability of funds for them.

25Three offices award money remained in their budgets because, according to OFM, transferring their

allocations back to OHR would have resulted in errors.26

SEC Office of Inspector General Audit Report entitled Audit of the SEC Budget Execution Cycle, ReportNo. 488 (Mar. 29, 2011).


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The relatively small size of the award budget coupled with the fact that no awardsare currently available for exceptional performance of job duties beyond theacross-the-board increase negotiated with the Union and unavailability of awardsfunds information until late in the year (and no information on incentive awards)significantly limits the effectiveness of awards and incentives on attracting,

retaining, and motivating individuals with needed talent. In addition, the paymentof awards at the end of the fiscal year results in the potential for payroll errors,including possible Anti-Deficiency Act violations.

Recommendation 7:

The Office of Human Resources (OHR), in conjunction withthe Office of Financial Management (OFM), should take thefollowing actions:27

7a. Develop alternatives for reviewing the SEC award

budget so that it is competitive with other federalagencies award budgets.

7b. Develop and implement a mechanism to rewardemployees for superior or meritorious performance withintheir job responsibilities through lump-sum performanceawards.

7c. Determine ways to reduce the time required forformulation of budget allocations, including, for example,moving responsibility for formulating award budgetallocations to OFM and having the Office of InformationTechnology walk-in development center develop anelectronic program to pull payroll data directly from theDepartment of the Interior to facilitate more timelycompletion of budget allocations.

7d. Put in place a process to make initial award allocations inthe first quarter of each fiscal year, thereby giving officesthe ability to make awards throughout the year. Baseinitial allocations on historical data and then refine theallocations, as needed, when the SECs annual budgethas been approved.28

27

In implementing these recommendations for 2011 and 2012, the SEC should adhere to budgetarylimitations in the Office of Personnel Managements June 10, 2011, Memorandum for Heads of ExecutiveDepartments and Agencies, from John Berry, Director, Office of Personnel Management and Jeffrey Zients,Deputy Director for Management & Chief Performance Officer, Office of Management and Budget, Subject:Guidance on Awards for Fiscal Years 2011 and 2012. In addition, we understand that union negotiationsmay affect the SECs ability to fully achieve the intended outcomes of the recommendation.28

We acknowledge that the SECs ability to put in place award budget allocations in the first quarter of thefiscal year may be impacted by possible future continuing resolutions.


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7e. Allocate award funds directly to SEC divisions andoffices instead of placing the initial award funds in OHRsbudget, and hold office and division heads responsiblefor monitoring use of the funds.

7f. Re-examine budgeted amounts for recruitment,relocation, and retention incentives to ensure thatsufficient funds are available, and make supervisorsaware of available funding so that they can effectivelyuse incentives to recruit and retain needed talent.

Management Comments. OHR and OFM concurred withthis recommendation. See Appendix V for managementsfull comments.

OIG Analysis. We are pleased that OHR and OFMconcurred with this recommendation. See Appendix V formanagements full comments.

Finding 4: OHR Did Not Maintain AdequateDocumentation to Support SK Awards MadeDuring Fiscal Years 2008 Through 2010

OHRs supporting documentation for a large number of the

monetary awards reviewed for this audit was incomplete.We found that documentation was insufficient to show thebasis for the awards and that required approvals wereproperly obtained. We also found that an award was madeto an SEC employee who was involved in an examinationand investigation of Bernard Madoff (Madoff) that failed todiscover Madoffs Ponzi scheme.

Cash Awards

During fiscal years 2008 through 2010, through memoranda issued by OED,

SEC Office Heads and Division Directors were provided allocations of awardfunds and asked to make nominations for SK monetary special act or serviceawards or on-the-spot awards. The memoranda specified that supervisors wererequired to use SEC Form 48 to document their award nominations and providea narrative justification discussing the tangible or intangible benefits of the act orservice being rewarded.


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Awards also required management approval. For fiscal year 2008,Commissioners, Division Directors, Office Heads, and Regional Directors werepermitted to approve awards up to $1,500. Awards from $1,500 to $10,000needed approval from the Executive Director, and awards above $10,000required approval from the Chairman. For fiscal years 2009 and 2010, awards

up to $2,500 could be approved by Commissioners, Division Directors, OfficeHeads, and Regional Directors; awards from $2,500 to $10,000 needed approvalfrom the Executive Director; and awards above $10,000 required approval fromthe Chairman.

To determine whether OHR was maintaining appropriate documentation for theawards it made, we judgmentally selected a sample of 29 of 8,759 available SKmonetary awards made from fiscal year 2008 through fiscal year 2010. Twenty-five of these awards were individual cash awards and four were group cashawards. On January 24, 2011, we asked OHR to provide us with thedocumentation supporting the awards. Specifically, we asked that for each

award, OHR provide us with an SEC Form 48 showing the type of award,appropriate approvals, and a narrative justification to describe the employeesachievements to warrant the award, and an SF 50, Notification of PersonnelAction, to show the processing of the award. In general, OHR was unable toprovide complete and timely information to support these awards. As of March31, 2011, OHR had provided only SF 50s for the majority of the awards in oursample. We determined that a primary reason for OHRs inability to timelyprovide the requested information was that OHR does not have a centralizedfiling system for these types of documents. During our audit, we found that manyOHR specialists maintained their own personal files to document the awards theyprocess.

OHR provided complete documentation (SF 50, SEC Form 48, and any relatedjustification or approvals) for only eight of the 29 awards for which we requesteddocumentation. For 20 of the awards, OHR provided only an SF 50 showing thatthe award was processed. OHR provided no documentation for one of theawards.

Because no SEC Form 48 was provided for 20 of the awards in our sample, all20 of those awards lacked documented justifications and documented approvals.Two of the 20 awards were large enough$6,000 and $7,000that they wouldhave required approval from the Executive Director, and two were largeenoughboth were for $15,000that they would have required approval fromthe Chairman. We also found with respect to one cash award for which an SECForm 48 had been provided, the signature block that should have contained thedated signature of the Regional Director (the approving official) had been leftblank.

We also found errors in the documentation that was provided. For eight awards,the documentation indicated that the award was rating-based. The SF 50s for


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four of these awards were assigned nature of action code 840 (Individual CashAward Rating Based). Under the SECs agreement with the Union, however, forthe fiscal year 2009 performance cycle, employees were permitted to receiveonly an equivalent performance merit increase, and performance-based awardswere not permitted. Hence, all SF 50s for cash awards should have had a nature

of action code 849 (Individual Cash Award Non Rating Based). Further, OHRcould not provide justifications showing the recommending offices basis forissuing the four awards. Based on discussions with OHR, we believe it is likelythat the rating-based nature of action code on the four awards resulted from adata entry error. However, the SF 50 for one of the four awards showed anaward amount of $1,472, and the narrative justification stated per agreementdated 10/3/08. Both the specific amount of the award and the justificationlanguage suggest that the award may have been part of a settlement agreementwith the employee rather than a special act award. OHR should research thesefour awards to determine whether they were in fact erroneously codedthat is,they were not performance-basedto ensure that none were made in violation of

the SECs agreement with the Union.

The other four awards with documentation indicating that they were rating-basedwere coded as non-rating-based cash awards (special act awards) on the SF50s, but the related justifications indicated that the awards related to theemployees normal duties. For example, one special act award stated that theexaminations led by the employee continued to have an extraordinarily highpercentage of significant findings ultimately resulting in successful referrals ofapparent fraudulent activity to the Division of Enforcement or the FinancialIndustry Regulatory Authority. In another case, the award justification stated thatthe employee was a participant in several examinations and investigations thatcontributed to the Commissions goals and mission and had implications insideand outside the agency. Although these justifications contained additional detailsregarding the specific examinations and investigations conducted and theiroutcomes, the justifications did not clearly show why the employeescontributions went beyond their normal duties and performance standards.Section 4-1 of the POPPS Manual, Special Act or Service Awards, states thatspecial act or service awards should be used to recognize non-recurringcontributionswhich are beyond the normal dutiesof employees (emphasisadded).

We also found six instances where multiple awards were made to the sameemployee within days of each other. In some cases, the total amount of themultiple awards to a single employee exceeded the $2,500 approval threshold forOffice Heads and Division Directors. For example, one employee received anaward on September 12, 2010, for $1,900 and another on September 13, 2010,for $785. Another employee received an award on September 12, 2010, for$2,100 and another on September 13, 2010, for $2,400. Because the awarddocuments were submitted separately, however, higher-level approvals were notobtained. In the first example, OHR was unable to provide documentation that


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would enable us to determine whether the awards related to separate acts orservices. In the second example, the awards related to the same performanceperiod, but the justifications cited different work performed to warrant eachaward.

Based on available documentation, we understand that the primary reason whymultiple awards were made to individuals within days of each other in fiscal years2009 and 2010 is that Office Heads and Division Directors did not receivenotification of award allocations from OHR until late in the fiscal year. Therefore,offices provided multiple awards at the end of the fiscal year to cover special actsthat occurred throughout the fiscal year. We also believe that some of the award

justifications were performance-based because special act awards were theprimary tool for recognizing staff who produced high-quality work until theagencys new performance system was fully implemented. As previously noted,during fiscal years 2008 and 2009, all employees who received a performancerating of acceptable received an equivalent percentage merit pay increase.

Further, we found two awards for which the only documentary support providedwere SF 50s showing award amounts of $6. While these amounts appear to beerroneous, OHR was unable to provide any further documentation to support theawards.

Time-Off Awards

We judgmentally selected 10 out of 3,601 time-off awards made from fiscal year2008 through fiscal year 2010 for review to determine if there was sufficientdocumentation to support the awards. The awards selected ranged from 8 to 40

time-off hours. Time-off awards allow supervisors to grant employees time offfrom duty as a means of encouraging and rewarding superior accomplishmentsor other personal efforts. According to the POPPS Manual, Chapter 451.A,Employee Recognition Program, Section 5. Time Off Awards, a time-off award isappropriate in situations in which an employee makes a unique contributioninvolving a difficult or important assignment; displays special skills or initiative incompleting an assignment or project before the deadline or in the face of unusualobstacles or pressures; uses notable initiative or creativity in makingimprovements in a product, activity, program, or service; or ensures that themission of the organizational unit is accomplished during a difficult period bysuccessfully completing additional work or a project assignment while

maintaining his or her own regular workload. A maximum of 40 hours may begranted to a full-time employee for a single contribution. Supervisors nominateemployees for time-off awards by completing an SEC Form 48 that includes a

justification describing the employees achievement and resulting benefit to theSEC. Time-off awards up to a maximum of three workdays can be approved byOffice Heads and Division Directors. The Executive Director is authorized toapprove time-off awards in excess of three workdays, up to the maximum 40hours for a single contribution.


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We found that OHR lacked sufficient documentation to support the majority oftime-off awards in our sample. OHR did not provide any documentation tosupport two of the 10 time-off awards and could only provide SF 50s to supportsix of the time-off awards. In addition, there was no documentation to show why

the Executive Director had approved two time-off awards that exceeded thethree-day limit, as required by the POPPS manual.

Cash Award to Employee Based in Part on 2009 MadoffInvestigation

In August 2009, we completed our investigation of the SECs failure to uncoverBernard Madoffs $50 billion Ponzi scheme.29

We found that the examinationsand investigations of Madoff and/or his firm were generally conducted byinexperienced personnel, were not planned adequately, and were too limited inscope. We further found that the SEC examiners and investigators failed to

understand the complexities of Madoffs trading and the importance of verifyinghis returns with independent third parties. As a result, we recommended in ourinvestigative report that the Chairman share with management the portions of theinvestigation that related to performance failures by employees who still workedat the SEC and that appropriate action, including performance-based action, betaken on an employee-by-employee basis.

We found during our review that one of the key participants in both the 2005examination and 2006 investigation of Madoff received a $1,200 cash award inApril 2010. The narrative justification for the award indicated that it was made, inpart, to reward the employees efforts in 2009 pertaining to a follow-on

investigation of Madoff. The award nomination was signed by the employeesBranch Chief and Assistant Regional Director on September 14, 2009, just twoweeks after the August 31, 2009, issuance of the OIGs final investigative reporton the Commissions failure to uncover the Madoff Ponzi scheme. Moreover,both the employee being rewarded and the Assistant Regional Director whorecommended the award were cited in the report for numerous performanceissues and were subject to potential disciplinary action at the time the awardrecommendation was made.

We did find that SEC postponed payment of the award to the employee until April25, 2010, after the SECs receipt of a report from Fortney & Scott, LLC,30

29

SEC Office of Inspector General Report entitled Investigation of Failure of the SEC to Uncover BernardMadoffs Ponzi Scheme, Report No. OIG-509 (Aug. 31, 2009).

which

concluded that the employees actions did not warrant formal disciplinary action.However, the Fortney & Scott report did not dispute the serious performanceissues pertaining to the employee raised in our report, including the fact that the

30Fortney & Scott, LLC, is a law firm that the SEC hired to serve as an expert to review performance issues

identified in the OIGs Madoff report and to advise the Commission concerning any personnel or disciplinaryresponses that might be warranted based on that report.


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2005 examination of Madoff in which the employee had played a critical role wasinappropriately focused, conducted without obtaining critical independent data,closed with unresolved issues remaining, and relied too heavily on therepresentations of Madoff. Further, the Fortney & Scott report recommendedformal disciplinary action, including removal from service, for the Assistant

Regional Director who approved the award nomination in question.

The lack of adequate documentation to support cash and time-off awards andapproval by division and office heads of awards to employees potentially subjectto disciplinary action, jeopardizes the integrity of the awards program.

Recommendation 8:

The Office of Human Resources should develop and train human resourcesspecialists on a centralized filing system (manual, electronic, or both) for allawards that contains appropriate documentation to support the awards,

including SF 50 and SEC Form 48 with narrative justification and appropriateapprovals.

Management Comments. OHR concurred with this recommendation. SeeAppendix V for managements full comments.


Recommendation 9:

The Office of Human Resources should implement management controls toensure that employees who are subject to disciplinary action are restrictedfrom receiving awards related to the performance that resulted in thedisciplinary action.

Management Comments. OHR concurred with this recommendation. SeeAppendix V for managements full comments.


Finding 5: A Cash Award Was InappropriatelyMade to a Schedule C Political Appointee

The SEC made a cash award to an SEC Schedule Cemployee in fiscal year 2010 in violation of OPM guidance


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restricting awards, bonuses, and similar payments forpolitical appointees.

In August 2010, OPM issued guidance restricting awards, bonuses, and similarpayments for political appointees beginning on August 3, 2010, and continuing

through the end of fiscal year 2011.

31

The guidance specifically prohibitsperformance and special act awards. For purposes of the guidance, all ScheduleC employees are political appointees.

To determine whether any Schedule C employees received monetary awardsduring the aforementioned restricted period, we obtained a current list ofSchedule C employees from OHR and compared the list with award datamaintained by OHR. We found that one Schedule C employee received a$2,000 cash award effective August 12, 2010. While we sought furtherinformation from OHR regarding this award during fieldwork, such as the SF 50and SEC Form 48 and related justification, OHR initially did not provide the

requested information. However, OHR recently informed the OIG that it hasdetermined the award to be improper and is taking appropriate action to recoverthe funds.

Recommendation 10:

The Office of Human Resources should review the August 12, 2010, cashaward to a Schedule C employee to determine whether it was in violationof the Office of Personnel Management guidance and, if so, seek recoveryof the improper award.



Finding 6: OHRs Employee Suggestion ProgramDid Not Provide Cash Awards During Fiscal Years2008 Through 2010 and Was Not Effectively

Managed

Although OHR had an Employee Suggestion Program inplace from 2008 to 2011 that included a monetary incentive

31Memorandum from John Berry, Director, Office of Personnel Management, Guidance on Freeze on

Discretionary Awards, Bonuses, and Similar Payments for Federal Employees Serving Under PoliticalAppointments, CPM 2010-14 (Aug. 3, 2010).


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component, OHR did not make any cash awards under theprogram. Additionally, the program was given little priorityand was not effectively managed.

In March 2008, OHR issued a formal directive for its Employee Suggestion

Program.

32

According to the OHR directive, the program was designed tomotivate employees to submit constructive ideas that contribute to the economy,efficiency, or effectiveness of government operations. A suggestion was definedas an idea designed to accomplish a job better, faster, and or/cheaper andwhich results in tangible or intangible benefits to the federal government. Thesuggestion may save material or property, promote health, increase safety, andimprove morale or administrative routine. Recognition in the form of a cashaward was to be given to eligible employees whose suggestions were adopted.Awards for suggestions that would result in tangible savings or benefits were tobe based on an estimate of the first-year dollar savings or benefits. TheExecutive Director or the Associate Executive Director for OHR had authority to

approve awards up to $10,000.

To submit a suggestion, employees were to complete a suggestion form orsubmit an e-mail or document to OHR with pertinent information about thesuggestion. OHR, according to its policy, would acknowledge receipt of thesuggestion within five days by e-mail and forward the suggestion forconsideration to the office or division that could benefit from the suggestion orwould be responsible for implementing it. OHR would then notify the employeewho submitted the suggestion regarding the decision made by the office ordivision that considered it. A sole employee in OHR, who was designated as theSuggestion Officer but had multiple other duties, was primarily responsible forcarrying out these activities. According to OHR, the employee who filled this roleretired from the SEC in 2009, and the role and job duties were not reassigned.

We gathered available information on the Employee Suggestion Program fromOHR and met with OHR officials who had knowledge of the program to ascertainwhether any cash awards had been provided to employees through the program.Although SEC employees submitted approximately 150 suggestions from fiscalyear 2008 through March 2010, OHR did not initiate any payment or monetaryawards to employees whose suggestions were implemented under the program.However, OHR provided e-mail documentation to show one case in which theoffice of the employee who made a suggestion provided the employee a $1,000cash award and a time-off award. Additionally, we found in our examination ofan internal spreadsheet that OHR provided to us, which showed the status andtracking of suggestions, that another employee had received a time-off award forsubmitting a suggestion to the Employee Suggestion Program, although thesource of the award was unclear.

32U.S. Securities and Exchange Commission Human Capital Directive, Employee Suggestion Program,

dated March 6, 2008, addressed to All Employees from Jeffrey Risinger, Associate Executive Director,Office of Human Resources.


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In our discussions with OHR, we learned that the Employee Suggestion Programwas given little attention and that at one time a significant backlog of suggestions(approximately 50) was assigned to various employee and labor relationsspecialists in the Office of Employee and Labor Relations to be reviewed and

closed out. Further, we found that the OHR internal spreadsheet for the programcontained limited current information on what close-out actions had been takenby OHR or the office or division to which the suggestion was referred. Forexample, the spreadsheet only contained information regarding pertinent dates,the suggestion topic, the individual who submitted the suggestion, and the o

Audit of SECs Employee Recognition Program and Recruitment, Relocation and Retention Incentives

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Transcript of Audit of SECs Employee Recognition Program and Recruitment, Relocation and Retention Incentives